The current digitisation trends allow digital companies to do business across borders without a physical presence, leading to a mismatch between the place of taxation and the place where the values are actually created.
EU directives for digital business models
Given the fact that some Member States have acted promptly in this issue under growing political pressure and modified their local legislation at their discretion, such a diversity of approaches to taxing the digital economy could lead to legal uncertainty, various barriers and, last but not least, fragmentation of the EU single market. Hence the need to introduce a comprehensive solution to this issue at EU level. For this reason, with a view to fair and efficient taxation of the revenues from modern digitised business models, the EU Council has come up with the proposal of two directives in the field of digital service taxation.
1 directive: Tax on digital services
The first directive introduces a new form of indirect tax on revenues from the provision of certain digital services by taxable persons. It will be applied to revenues generated from the sale of online advertising space, brokerage services (shared economy services) and from the sale of data obtained on the basis of information provided by the users.
The proposed tax on digital services would be applied at the rate of 3% of the gross annual revenues in the EU derived from the provision of specific digital services and would be payable in the Member State(s) where the users of the services are located.
This tax should only be a temporary solution that would apply until the adoption of the structural and complex changes in the area of corporate taxation.
2 directive: Taxation of income of digital businesses
The second directive is the Council Directive laying down rules on the taxation of income of legal entities, which are characterised by a digital presence. The aim of this directive is to ensure that the revenue from the provision of digital services is taxed where the value is created, extend the concept of permanent establishment to a significant digital presence and establish the principles of attribution of profit to such a fixed establishment, which will be based on the transfer pricing rules and on functional analysis.
The adopted amendments should be reflected in the change of bilateral treaties on the avoidance of double taxation as well as in the change of the OECD Model Tax Convention.
Limits and additional information to the directives
Both directives propose limits (e.g. according to the amount of turnover, the number of users of the services) to identify companies that would be subject to those obligations so as not to have a negative impact on small and medium-sized enterprises. However, since the limits are set relatively high, the Slovak Republic will seek, according to unofficial information, to enforce their reduction so that the set limits would not exclude the application of the directives in the territory of the Slovak Republic.
The Member States must transpose the directives no later than 31 December 2019 with effect from 1 January 2020.
TPA tax tipp
In order to minimise tax evasion, transfer pricing rules are tightened every year, which results also in the growing trend of tax audits focused on this area. The average amount of the additionally assessed income tax within one tax audit represents hundreds of thousand Euros.
The best way to demonstrate that the transfer prices between related parties are in compliance with the market values is to prepare the transfer pricing documentation.
If you are an active digital business or are planning to open a digital business, contact our tax experts in time!